Will Non-Competes be a Thing of the Past?
By Kelly A. Hayden, JD, Chief Legal Counsel
Published January 24, 2023
The Federal Trade Commission (FTC) has proposed a rule that, if enacted in its current form, would effectively prevent employers from entering into non-compete agreements with any employee, irrespective of the circumstances.
A non-compete agreement, as defined by the FTC, is any contractual provision that “prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker's employment with the employer.” The definition of worker is broad and includes more than just “employees” – the rule would also apply to interns, independent contractors, volunteers, and sole proprietors. While the rule does not specifically apply to confidentiality and/or non-solicitation agreements, the rule states that if such agreements constitute “de facto” non-competes, they will be prohibited. An agreement may be a “de facto” non-compete if it has the effect of prohibiting an employee from accepting other employment upon conclusion of the employee’s employment.
Other facets of the FTC’s proposed rule include:
- An exception to non-competes entered into as the result of the sale of a business. Such exception would only apply to those who hold at least a 25% interest in the business being sold at the time the individual enters the non-compete.
- Retroactive application of the rule once it is approved, meaning that employers would be required to rescind previous non-competes that could still affect employees once the rule is passed. The proposed rule contains model language that an employer could use to inform employees of the rescission and designates a safe harbor for employers who comply.
The FTC is currently in a comment period regarding the rule, which will end on March 20, 2023. Comment can be submitted at regulations.gov. Once the public comment period ends, the FTC will likely publish a final rule that would take effect 180 days after the publish date.
Illinois employers or those with employees working in Illinois should recall that the state significantly revised the law pertaining to non-competes, effective January 1, 2022.
HR Source will keep members informed of any action taken by the FTC about the proposed rule. Members with questions can contact the Employment Law Services Department through the HR Hotline online or at 800-448-4584.